Academic journal article Business Economics

The Auto Industry in Latin America: The Challenge of Adjusting to Economic Reform

Academic journal article Business Economics

The Auto Industry in Latin America: The Challenge of Adjusting to Economic Reform

Article excerpt

WHILE HEADLINES focus on the rapid collapse of the centrally planned economies, the Latin American countries proceed on their own fast march toward liberalizing their economies. This march is already forcing rapid adjustments by the traditional players in these markets. It will drastically change the nature of the auto industry in the region during the next decade.

In order better to understand the upcoming changes in the Latin American auto industry, it is essential to analyze the key elements of the structural changes that transform the Latin American economies from a state-controlled into a free-market system.

STRUCTURAL REFORMS

Today almost all the major economies in Latin America, with the possible exception of Brazil, have aggressively moved away from the import substitution and state-controlled development model that prevailed since the 1940s. Chile was the first coun| try to attempt such a move in the late 1970s, under the Pinochet regime. Although some of the elements of economic reform were not implemented until 1984. Bolivia followed the Chilean example in 1985, after more than two years of hyperinflation. Yet, annual inflation still remains above 20 percent in Chile. In Bolivia, while annual inflation is in the one-digit level, privatization is still to come.

It was not until the Mexican experience in 1988 that the key elements of success were defined and the sequencing of implementation clearly identified. Subsequently, Argentina in 1989, Venezuela in 1990 and Colombia in 1991 also took decisive steps toward liberalizing their economies. Brazil, the largest economy in the area, is still dragging along and finding many (mostly political) difficulties in adopting the process. It is not coincidental that in all cases except Chile the decisive steps were taken as a last policy alternative. The steps were to end a recession produced either by the 1982 debt crisis directly, or by the 1983-86 adjustment policies, or to end hyperinflation of Bolivia in 1985 and Argentina in 1989. The key elements of reform in each of these countries, and how the auto industry will have to adjust to such reforms are interesting.

MEXICO: A FAST AND SIMULTANEOUS PROCESS

The Mexican experience is perhaps the clearest example to identify the key factors contributing to quick success. In 1988 Mexico began its economic restructuring by focusing simultaneously on four interrelated issues: price stabilization, privatization, domestic deregulation and trade liberalization.

The price stabilization process was buttressed through a series of social pacts. The first was announced in December 1987, when annual inflation was 160 percent. Mexico's policymakers recognized that without stabilizing the public sector's budget it would be impossible to implement a responsible monetary policy. Price stabilization would not have lasted longer than the failed experiences of the Austral (Argentina, 1985) and the Cruzado (Brazil, 1986) plans. The control of the public deficit was achieved through both the revenue and the expenditure sides. On the revenue side, tax reform was implemented broadening the tax base and simplifying the tax structure, and the laws were rigorously enforced. On the expenditure side, major cuts in public sector investment were implemented, all subsidies were eliminated (including gasoline subsidies, in spite of Mexico's oil richness) and an agressive privatization program was immediately begun.

By 1991 only 212 firms remained in the public sector out of the 1156 that existed in 1982. More importantly, while most of these firms were sold to private investors (domestic and foreign), many were simply closed, in spite of the high political cost of higher unemployment. Many organizations that had been set up within the public bureaucracy to oversee public companies were eliminated, "leaning up" the administration.

The third element of economic reform was domestic deregulation. …

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